Approval of Coach Houses Opens the Way to Better Urban Design

(This article first appeared in OBJ,  https://obj.ca/article/opinion-coach-houses-open-door-better-urban-planning-ottawa.)

As OBJ readers may already know, the city of Ottawa recently changed its bylaws to permit construction of coach houses on many existing residential lots.

This is part of a worldwide effort to densify and intensify existing urban areas to make them more interesting, more diverse, and more successful places to live.

I expect coach houses (which used to be called “granny” flats because most of their residents were female elders who tend to survive male partners by eight or so years) to have a profound impact not only on the urban fabric of Ottawa, but also on an individual homeowner’s ability to take care of themselves and their families, mostly from a financial point of view.

How so?

Let’s assume you own an existing house in Ottawa that is worth a city-wide average of $380,000. You decide to add a 2-bedroom, 1-bath coach house in your backyard covering 40% of the area there. The thought is that it’s going to add a bit of income for you when you retire at 55! (Remember Freedom 55?)

Now, let’s suppose it costs you $120,000 to build your new coach house and maybe you use a design like the clever one shown below created by architectural technologist Leo Clement and coach house builder Chris Long.

The turning circles you see on the main floor are for wheelchair access —having a 0-step entry, wider corridor/doorway widths, and a roll-in or step-in shower are important elements. Why? Because CMHC predicts that by 2032 nearly a quarter of Ottawa’s population will be seniors so why build something that excludes as much as 25% of your potential marketplace?

Two bedrooms are essential too—not just because most couples by the time they are in their 50s, 60s, 70s and 80s are sleeping in separate rooms—but also because then it’s set up for roommates (young or old) to occupy. They also cheated a bit—Mr Clement included a loft-sleeping platform accessed by a ship’s ladder—that’s for visitors to use, most probably grandkids.

So what is your ROI, return on investment, if you build something like this?

Here’re my calculations:

cost of construction: $120,000

rental income:  $1,800.00 per mth including utilities

tech package (Netflix, basic cable, net phone, internet, wi-fi, large screen TV): $115 per mth

total rental income:  $1,915.00 per mth

operating costs, utilities, property management, tech package, administration , insurance: ($459.60) per mth based on 24% of total rental income

vacancy allowance: ($95.75) per mth based on 5% vacancy rate

NOI, net operating income: $1,359.65 per mth or $16,315.80 per annum

cap rate: 13.6% per annum

E&OE

So your cap rate (capitalization rate, a measure of return based on you making this investment as if it was funded in cash, ie, without adding to your mortgage) is 13.6% pa. When you compare this to what you get on your savings at your bank (anywhere from .99% to 1.7% pa today) or what most of your mutual funds are probably doing (mine are horrible—around 2% to 4%), it looks quite satisfactory. There is also the hope that your real estate will go up in value over time, which compounds your return. A cap rate only measures cash returns not inflation or mortgage principal paydown (if you have a mortgage).

Now $16,316 of extra annual income might not sound like a whole heck of a lot but when you compare it to the average CPP (Canada Pension Plan) payout today of just $550 per month, it can make a big difference, especially to elders living on fixed incomes.

Alright, so far so good.

But changing bylaws is not sufficient to see a new industry bloom in Ottawa. We have to be cautious in our early assessment because the coach house idea is not new.

I worked on a Kanata subdivision (called Briarbrook) more than 25 years ago when I was at Terrace Investments Limited, the first parent company of the Ottawa Senators. We put in the zoning there that granny flats would be permitted—on larger pie-shaped lots, you know the ones that are created when a roadway turns a corner.

None was ever built. How come?

Because the city of Kanata (long since absorbed by Ottawa) imposed rules that made their construction impossible—rules like you could only rent them to related persons, you could only get a “temporary” building permit of five years (presumably after which you’d have to remove the structure or tear it down), and you had to pay a full development charge to help fund off-site infrastructure even though none was needed.

The coach house bylaw passed by city council last month includes a significant development charge (around $6k for transit development) and it prohibits having both a coach house and an in-home suite… a big mistake, in my view.

Essentially, you have to choose between, say, a legal basement apartment, and a granny flat in your backyard. As someone who coaches 100s of real estate investors, I already know this is a difficult choice.

So here’s what’s likely to happen: we are going to go back to the same condition that prevailed before in-home suites were legalized a decade ago. Folks will build coach houses and after they get their occupancy permits, they’ll build out illegal basement apartments. Bad idea.

We probably had tens of thousands of those, many of them not only illegal but unsafe as well. If the city really wants to intensify and densify, both should be allowed.

So why not allow both?

Well, city planners and local councilors live in perpetual fear of the NIMBY movement, not in my backyard political activists who detest almost any change in their neighborhoods. Their concerns? You’ll hear lots of talk about more traffic, more pressure on infrastructure and schools, negative environmental consequences such as tree removal, more policing costs (due to “undesirables” taking up residence in basement suites or coach houses) but in reality it all boils down to one thing—money. They fear that property values will drop.

But in almost every instance I have studied, greater densities and intensities resulted in higher property values not lower ones. Take the Glebe, for instance. A desirable Ottawa neighborhood to live in, n’est-ce pas?

It has lots of sideyard, backyard and basement apartments plus coach houses, metal bashing shops, garage mechanics, restaurants, offices, arena, stadium, and traffic galore, but trust me, a home in that area is not going down in value. The caveat on this is that order and peace are maintained, the sine qua non of creating value in any society or town. Fortunately, Ottawa-Gatineau is still one of the safest million+ population places in the world to live in.

If we are still afraid of NIMBY attack, maybe we could do worse than borrow a concept from radical English prime minster Theresa May—who found a way to turn NIMBY activists into PIMBYs (please in my backyard) supplicants. She did it by making sure that any so called “undesirable” use pays a royalty, which instead of going into the coffers of municipal, provincial, state or federal governments goes instead directly to neighbors affected by the change.

That might be a bridge too far for councilors but it would probably work.

Out of curiosity, I calculated what would happen if other cities, towns and villages followed Ottawa’s example and started to permit coach houses.

I estimated that there are about 195 million dwellings in the US and Canada, and if 20% of those are suited to adding coach houses, and if all of them did so, then it would add $1.8 trillion per year to GDP in those two nations. Wow.

Here’s the thing—I love what the tech industry can do for a town like Ottawa. It’s also great to have other economic engines running flat out such as the government sector, tourism, education, health, and entertainment. But there is no industry bigger than the real estate industry—everyone needs a place to live, shop, work, learn, make, play, earn… so if we could take the planning shackles off urban designers and real estate investors, they’d be able to create a much more vigorous environment for everyone else to generate wealth in.

Hey, they did it in Rotterdam, a failing industrial port city in the Netherlands, which is now a world-leading hotbed of highly experimental, sustainable urban development and design. Ottawa could do worse than follow their lead—so what about co-opting an entire neighborhood here where creative new solutions to off-grid energy issues, grow local, or live- work-play-shop-learn-make challenges could be encouraged without the dead hand and expense of planning regulators shooting them down?

Merry Xmas, happy holidays and wishing everyone a safe and prosperous New Year.

Bruce M Firestone, PhD, Ottawa Senators founder, Century 21 Explorer Realty broker, Real Estate Investor coach. Follow him on twitter @ProfBruce or email him bruce.firestone@century21.ca